DAILY MORNING NOTE | 23 October 2023

Week 43 equity strategy: The 10-year US Treasury (UST) bond crossed 5%, the first in 16 years. There are multiple reasons for the rise in yields. We believe the foremost trigger is the burgeoning US fiscal deficit. Over the past 12 months, the deficit has swelled by US$1tr, contributing an incremental 3.7% boost to GDP. The deficit was especially acute over the past 4 months as it surged by almost US$900bn. Together with quantitative tightening, the supply of bonds absorbed by the public (or market) was an astonishing US$1.7tr. In contrast, it was only US$400bn a year ago. The rise in fiscal deficit was positive for economic growth and equities. The downside was the continued climb in bond yields.

Another factor was the “higher for longer” interest rate guidance by the Fed that normalised term premiums (10Y UST less Fed Funds Rate). Term premiums should be positive, serving to compensate the risk and volatility in locking in your interest rates for a longer period. The term premium has been negative (or inverting) for the past 10 months against its long-term average of around 100 bps. Finally, real interest rates (Fed funds rate less core PCE) have started to steepen. Central banks’ tolerance for higher real interest may be due to the stickiness of recent inflation data despite their aggressive rate hikes. Long-term real rates are around 150bps. Assuming the Fed hits its inflation goal of 2%, the fair value of 10Y UST is 4.5% (2% plus 150bps plus 100 bps).

We do find bonds attractive as we expect Fed to pause following Powell’s recent comments that financial conditions have clearly tightened. In addition, we think the growth in fiscal deficits will taper down from reduced social security payments and delayed tax collections from California. US growth will also be dragged down by student debt repayment, higher interest rates and falling excess savings from the pandemic stimulus.

Paul Chew
Head Of Research

Singapore shares ended the week on a slump falling 0.7 per cent, tracking regional losses in Asia-Pacific markets on Friday (Oct 20). Across the broader market, decliners beat gainers 341 to 256 as some 1.5 billion securities with a total value of S$1.1 billion were transacted. All three local banks finished in negative territory. DBS fell 0.3 per cent to S$33.08, UOB dipped 0.4 per cent to S$27.76 and OCBC shed 0.3 per cent to S$12.79.

Major US stock indexes ended sharply lower on Friday (Oct 20), with technology and financial shares among the biggest drags, as investors worried about more interest rate hikes and the Israel-Hamas conflict spreading. The benchmark 10-year Treasury yield fell on Friday, a day after crossing 5 per cent for the first time since July 2007 in the wake of comments by Federal Reserve chair Jerome Powell. The S&P 500 lost 54.48 points, or 1.27 per cent, to end at 4,223.52 points, while the Nasdaq Composite lost 202.46 points, or 1.54 per cent, to 12,983.81. The Dow Jones Industrial Average fell 291.83 points, or 0.87 per cent, to 33,122.34.

Top gainers & losers





Suntec REIT has reported a distribution per unit (DPU) of 1.793 cents for the 3QFY2023 ended Sept 30. The quarter’s DPU is down by 14.0% y-o-y but up by 3.1% q-o-q. Unitholders will receive their distributions on Nov 29. Similarly, the REIT’s 3QFY2023 distributable income of $52.0 million fell by 13.3% y-o-y but rose by 3.6% q-o-q. Gross revenue for the 3QFY2023 rose by 15.0% y-o-y to $123.4 million while net property income (NPI) rose by 9.7% y-o-y to $84.6 million. During the quarter, the REIT’s office portfolio saw a committed occupancy rate of 97.4% while its retail portfolio had a committed occupancy rate of 97.9%. Portfolio weighted average lease expiry (WALE) for its office assets stood at 4.3 years while its retail assets’ WALE stood at 2.2 years. As at Sept 30, Suntec REIT’s aggregate leverage ratio increased by 0.1 percentage points q-o-q to 42.7%. Its adjusted interest coverage ratio (ICR) fell by 0.1x to 2.0x.

Yangzijiang Financial Holding’s chief executive officer and chief investment officer (CIO) of its Singapore business, Vincent Toe, will be leaving the organisation next year “to pursue other opportunities”, the company said on Friday (Oct 20). The group’s executive chairman, Ren Yuanlin, who is also the founder and largest shareholder of Yangzijiang Shipbuilding will assume the role of CEO on the date of Toe’s departure on Apr 24, 2024. Toe will remain at the helm for the next six months, to provide continuity during the transition period, and to ensure the smooth running of the group’s operations. It does not expect Toe’s departure to impact the group’s day-to-day operations. With Toe’s departure, the group will be streamlining its management roles. Yangzijiang Financial’s current chief financial officer (CFO) and chief operating officer (COO) Liu Hua will take on the additional role of deputy CEO. The roles of CIO in Singapore and China will be removed.

SIA Engineering has completed the acquisition of an additional 10% stake in JAMCO Aero Design & Engineering (JADE). Following the completion, JADE is now a subsidiary of SIA Engineering with JAMCO Corporation and JAMCO America holding the remaining 40% and 5% in JADE respectively. The acquisition is not expected to have a material impact on the net tangible assets per share or the earnings per share of the SIAEC Group for the financial year ending 31 March 2024.

Real estate company Second Chance Properties has announced that the group’s net profit for the financial year ended Aug 31, 2023, will “increase significantly” when compared to the net profit of S$14.2 million for the same period a year ago, based on the management’s preliminary review of the unaudited consolidated financial statements. It said in a bourse filing on Friday (Oct 20) that the expected increase in net profit is due to the increased dividend income received in FY2023 on quoted securities as well as gain on disposal of investment properties. There is a realised gain of S$5.4 million upon cash acquisition as well as disposal of a few equity instruments held by the group and classified as financial assets, at fair value through other comprehensive income. This gain, however, is taken directly to equity through retained earnings, it said in the filing. The mainboard-listed company said it is still in the process of finalising the results for FY2023, and expects the unaudited financial statements for the group to be released on or around Oct 30.

The Singapore Exchange Securities Trading Limited (SGX-ST) Listings Disciplinary Committee (LDC) has issued a public reprimand to Y Ventures Group. The group was said to have breached SGX’s Catalist rule 703(4)(a) by releasing its unaudited financial statements for the 1HFY2018 ended June 30, 2018. The results were said to have been inaccurate and non-factual with material errors and, or omissions. The group also breached Catalist rule 703(1)(a) by failing to disclose that its half-year results were “false and misleading”. This fact, which was said to be known to the company, was important in order to avoid establishing a “false market” in the company’s securities. Finally, the group breached Catalist rule 719(1) by “failing to have a robust and effective system of internal controls, addressing financial, operational and compliance risks”.


Credit card giant American Express on Friday (Oct 20) reported third-quarter profit that beat expectations, helped by resilient spending from its wealthy customers who shrugged off concerns about an economic downturn. AmEx, which caters to a premium customer base, has largely been able to mitigate the hit from inflation and the Federal Reserve’s rate hikes, which have made borrowing costly and reined in discretionary spending. “Travel and Entertainment (T&E) spending remained robust… Restaurant spending was again one of our fastest-growing T&E categories,” CEO Stephen Squeri said in a statement. The company reported a profit of US$2.45 billion, or US$3.30 per share, up from US$1.88 billion or US$2.47 per share a year earlier. On average, analysts had expected a profit of US$2.94 per share. In a sign of caution, however, AmEx boosted its provisions for credit losses to US$1.23 billion, up 58 per cent from last year, to account for the increased likelihood of consumers defaulting on their debt. Revenue, net of interest expense, surged 13 per cent, to US$15.38 billion.

European Union antitrust regulators have resumed their investigation into Photoshop maker Adobe‘s US$20 billion bid for cloud-based designer platform Figma, setting a Feb 5 deadline for their decision, a European Commission filing showed on Friday. The EU watchdog stopped the clock last month while waiting for requested information from the companies. It has said that the deal may eliminate an important rival to Adobe and allow it to restrict competition in global markets for the supply of interactive product design tools. Adobe will likely have to provide remedies to address such concerns before it can secure regulatory approval for the deal.

The United Auto Workers union believes there is “more to be won” in ongoing contract negotiations with the Detroit automakers following five weeks of labor strikes against the companies, UAW President Shawn Fain said Friday. His comments come despite record contract offers from General Motors, Ford Motor and Stellantis that now include 23% hourly pay increases and other significantly enhanced benefits during the terms of the four and a half-year deal. “There is more to be won,” Fain said during an online broadcast. “These are already record contracts, but they come at the end of decades of record decline. So it’s not enough to be the best ever, when auto workers have gone backwards over the last two decades. That’s a very low bar.” Despite Fain’s comments, the union did not announce additional strikes Friday against any of the companies. He said the “bottom line is we’ve got cards left to play, and they’ve got money left to spend.”

Negotiations between media companies and the union representing striking US actors will restart on Tuesday, the two sides said in a joint statement on Saturday. Talks broke down last week as the sides clashed over streaming revenue and the use of artificial intelligence. The strike has disrupted film and television production, leaving thousands of crew members without work as well as the actors. Members of SAG-AFTRA, which represents 160,000 actors and other media professionals, have been on strike since July. The union is seeking a deal with the Alliance for Motion Picture and Television Producers (AMPTP), which negotiates on behalf of studios. “SAG-AFTRA and the AMPTP will meet for bargaining on Tuesday, October 24th at SAG-AFTRA Plaza. Several executives from AMPTP member companies will be in attendance,” said the joint statement. It gave no further details. Hollywood’s film and television writers ratified a new, three-year contract earlier this month, ending their 148-day work stoppage.

Top US financial regulators on Friday (Oct 20) delayed a deadline for comments on their sweeping plan to impose tighter capital rules on big banks. The Federal Reserve, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency said in a joint release that they would extend the comment period to Jan 16 from the original Nov 30. The Fed simultaneously announced that it would push back the deadline for comments on a proposal to revise the capital surcharge for the eight largest banks. In addition, it has started to gather data from banks affected by the proposal. Both of these deadlines are on Jan 16. The capital mandates proposed in July set up a pitched battle with the industry over whether the regulators’ push for financial stability would make the large lenders less competitive. The measures would force the banks to thicken their cushions to absorb unexpected losses. Lenders with at least US$100 billion in assets would have to boost the amount of capital set aside by an estimated 16 per cent. The eight largest banks face about a 19 per cent increase, and lenders between US$100 billion and US$250 billion in assets would see as little as 5 per cent more, according to agency officials.

Drugmaker Merck will pay Daiichi Sankyo US$5.5 billion to jointly develop three of its candidate cancer drugs, they said, in a deal that could be worth up to US$22 billion to the Japanese firm depending on the success of the cell-targeting therapies. The three drug candidates to be developed with Merck belong to the class known as antibody drug conjugates (ADC) and are in various stages of clinical development for the treatment of multiple solid cancer tumours. The Merck collaboration will help “expand the reach of the three products to a wider patient population”, Daiichi Sankyo CEO Sunao Manabe said at a briefing for analysts. The drug candidates – patritumab deruxtecan, ifinatamab deruxtecan and raludotatug deruxtecan – have “multi-billion dollar worldwide commercial revenue potential for each company” by the mid-2030s, the two companies said. The companies will jointly develop and potentially commercialise the drug candidates worldwide, except in Japan, where Daiichi Sankyo will maintain exclusive rights, they said. Daiichi Sankyo will be solely responsible for manufacturing and supply. Merck will pay Daiichi Sankyo US$4 billion up front, in addition to US$1.5 billion in continuation payments over the next two years. Merck may make additional payments of up to US$16.5 billion, contingent on future sales milestones, or US$5.5 billion for each product.

Source: SGX Masnet, Bloomberg, Channel NewsAsia, Reuters, CNBC, WSJ, The Business Times, PSR


Keppel Corp – Stable energy sales, weak real estate markets

Recommendation: BUY (Upgraded); Last Done: S$6.31

Target Price: S$7.52; Analyst: Peggy Mak

– 3Q23 revenue fell 6.0% YoY, dragged lower by weak property sales in China and India, after the rebound in 1H. 3Q23 net profit was higher YoY, but no financial detail was provided.

– The distribution-in-specie of 1 KREIT unit for every 5 Keppel shares has been approved by shareholders. This is equivalent to S$0.18 per Keppel share.

– Upgrade to BUY due to recent price correction. We maintain our earnings projections. After accounting for the KREIT distribution, our TP is revised lower to S$7.52 (prev. S$7.70).

Tesla Inc – Cloudy outlook on margins

Recommendation : ACCUMULATE (Maintained); TP: US$240.00, Last Close: US$211.99

Analyst: Jonathan Woo

– 3Q23 results were in line with our estimates. 9M23 revenue/PATMI was at 72%/70% of our FY23e forecasts. 435K vehicles were delivered in 3Q23, and it is still on track for 1.8mn target in FY23e (+37% YoY).

– Cost per EV improved to US$37.5K (-5% YoY) due to lower material and freight costs. Auto gross margin at 15.9% excl. credits was down 1050bps YoY due to: 1) price cuts; 2) factory downtime; 3) Cybertruck ramp-up. Cybertruck ramp-up is expected to be a margin headwind for 12-18 months.

– We cut our FY23e/FY24e EBITDA estimates by 8%/12%, respectively, to reflect further margin compression, with a reduced DCF target price of US$240 (prev. US$265). We maintain an ACCUMULATE recommendation. We believe TSLA is still well positioned for long-term growth given its leading position in the EV industry. Our WACC/growth rate assumptions remain the same at 9%/5%, respectively.

Netflix Inc – Gaining subscriber momentum

Recommendation : ACCUMULATE (Upgraded); TP: US$455.00, Last Close: US$401.77

Analyst: Jonathan Woo

– 3Q23 results were in line with our estimates. 9M23 revenue/PATMI at 72%/82% of our FY23e forecasts. Paid memberships grew 11% YoY, its highest growth rate since 1Q21.

– 8.8mn net additions were the most in 3 years for a quarter, mainly due to the conversion of password borrowers. NFLX ended 3Q23 with 247mn paid memberships.

– Guided acceleration in revenue growth of 11% YoY for 4Q23e on the back of continued success of its Paid Sharing program, and price increases in its US/UK/FR markets.

– We nudge our FY24e EBITDA by 3% on higher content amortization, and upgrade to an ACCUMULATE recommendation from NEUTRAL with a raised DCF target price of US$455.00 (prev. US$446.00). NFLX remains our top choice for streaming entertainment given its pricing power, growing membership base and quality content. Our WACC/growth rate assumptions remain the same at 12.2%/3% respectively.

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